Business incentives: has North Carolina got game?

This month WRAL published a series that investigated North Carolina’s booming incentives business. (Read parts 1, 2 and 3) The series cited a 2009 study (PDF) by the UNC Center for Competitive Economics conducted for the NC General Assembly. The Center analyzed all of North Carolina’s incentives used between 1996 and 2006, and judged their effectiveness with the following criteria:

Quality job creation: number of new jobs and/or existing jobs retained; new job and wage levels; whether the job was in a targeted industry; job location; upward employment opportunities; and hiring existing residents.

Distressed areas benefit: share of new jobs created in Tier One (neediest) counties; re-employment of displaced workers; and replacement of declining industries.

Between 1996 and 2006, about 5,000 companies participated in at least one incentive program; either tax credits or discretionary incentives like JDIG and One NC Fund. Tax credits make up the vast majority of incentive allocation – they represent 98 percent of North Carolina’s incentive portfolio. Most firms get small incentives; in fact, 44 percent of them received less than $25,000, “calling into question the effectiveness of such small amounts on business behavior.”[i]

Overall, tax credits aren’t the most effective tool in North Carolina’s incentive arsenal. Only 18 percent of tax credits were used specifically for job creation efforts; the majority of that money went to ward machinery and equipment development. Additionally, just over half of businesses that received a tax credit had positive job growth, meaning they had more employees in 2006 than 1996. More than four in ten of the businesses actually had fewer employees after ten years. Finally, fully half of the tax credits the Center identified went to the state’s least economically distressed counties.

“Discretionary programs provide an opportunity for a transformative effect on the state’s most distressed regions by laying the groundwork for future growth and employment in areas struggling with economic adjustment and unemployment.”[ii]

The authors found that discretionary incentives were the most effective at meeting job creation goals. Programs like JDIG and the One NC Fund are better directed at targeted industries, and more likely to influence a company’s location or expansion decision. According to former Commerce Secretary Jim Fain, “81 percent of the jobs induced [by JDIG] to date have been in our targeted sectors.”[iii] However, discretionary programs still favor less distressed counties.

"If you want to be in the recruiting game today, incentives are part of the deal. If you don't have incentives, you are going to lose opportunities."[iv] – Norris Tolson, NC Commerce Secretary, 1997-98. via WRAL

The political reality is that incentives aren’t going anywhere. With that in mind, North Carolina needs to focus its resources on the smartest, most effective incentives possible. Targeting and refining its discretionary programs, rather than relying on tax credits, has the potential to keep pushing North Carolina forward and revitalize the areas that need it the most.